Our Dysfunctional Health Care System: A Different Kind of Information Problem

I don’t just work on health care from an IT angle; I also sometimes work on payment issues. And in this context it has occurred to me that we have also have information problems. They’re a little different from the kind you get in IT, but some day, when we have resolved all our problems in building out IT infrastructure (yeah, right), it will be all about the content. That’s the real point of IT anyway, isn’t it?

Well, whatever. But I recently had what I thought was some interesting correspondence about the problem of information asymmetry in health care. The presenting problem was, what are reasonable health insurance administrative costs?

This is one of the areas in which analysts often tell us we may be able to save some money. After all, what is it that health insurers contribute, and why should we pay for them?

However, you can’t figure out what the reasonable cost of anything might be, unless you can figure out what you’re paying for. This question which immediately brings up a whole set of deeply embedded, problematic issues of long standing.

– There are a lot of variables and interactions in complex interaction, making it difficult for even the experts to accurately assess and predict the implications of policy changes, or for that matter the implications of continuing the status quo;

– The average person, even the average educated person who’s trying to pay attention in good faith, and definitely including the average policymaker, including those trying to act in good faith, probably doesn’t have the background or experience to know what the facts and issues are in any depth;

– There are very strong, well-organized financial interests playing an ultimately zero-sum game (healthcare expenditures cannot actually go up forever);

– Healthcare issues are valuable partisan footballs, perhaps especially when they are distorted; and

– The mainstream media hasn’t, with a very few exceptions, sufficient expertise to clarify the issues.

This makes it, ahem, difficult to get agreement on exactly what any data show. But here are a few thoughts, anyway.

In the first place, I personally don’t believe it’s possible to have a genuine free market for healthcare goods and services, if by that is intended a marketplace in which individuals consumers purchase goods and services, and their purchasing decisions set a price which is accepted as politically legitimate. The healthcare market is subject to too many information asymmetries – individuals don’t and frequently can’t know what they need or the factors they ought to consider – and motivational asymmetries – how much are you really going to haggle over the price of treatment for that cancer that will kill you if you don’t get it? How about if it’s your daughter?

I also don’t think culturally the US is ready to simply state that in healthcare you get what you can pay for, and if you can’t afford it that’s your own problem, period. (Personally, I’m rather glad of that.) Nor do we have anything like an adequate charity safety net – I’m not sure we could, without charitable institutions becoming a much larger sector of the economy. Unless we are willing to live with the political, social and moral consequences of trying to enforce a consumer-based healthcare marketplace, we need some other mechanism to set healthcare prices.

(Editorial comment: The only reason markets in anything important are allowed to exist is because their pricing results are accepted as politically legitimate. Whenever they are not, for important goods or services, for a material portion of the population, for a material period of time, political intervention is inevitable. You can argue it *shouldn’t*, but I would argue that that is an ideological position, and history shows this happening time and again.)

This is why we have health insurance: To set healthcare prices by negotiating (in the larger sense) with providers. You could do this differently, of course; single payer is the obvious alternative, with a single entity to do all the purchasing negotiation. Or you could simply set prices by government fiat. Whatever the possible merits of such approaches, the US doesn’t do it that way, and clearly isn’t going to go there in the current round of reforms.

The core administrative functions of health insurance companies are all related to healthcare price negotiations. Claims management is ultimately a set of processes for making sure the “right” price is paid for a given set of products and services; prior approval is a process for negotiating the purchase of specific products and services; underwriting is a process for making sure the insurance company takes in enough funding to pay for predicted payments; and so on. In all of these activities, the insurance company is negotiating from a position of lower information and motivational asymmetry than individuals would; it may not know as much as the provider does but it knows a lot more than an individual, and for better or worse it certainly doesn’t care the same way the individual does. (This is probably the main reason people hate insurance companies – they will deny care that individuals are motivated to want.) Of course, the same is true for a single—payer or government fiat solution.

In this context one of the valid arguments against private insurance companies is that they have additional non-core administrative functions, such as marketing, that don’t (or aren’t seen to) support their core functions. Conversely, one of the valid arguments against single-payer and government fiat is that they tend to inflexibility: This is what we do, take it or leave it. Personally (that word again), that is the reason I tend to favor continuing private insurance: The companies are likely to adapt more flexibly and may be more likely to support valuable new approaches, e.g. better case management and wellness programs, which reduce claims by creating incentives for healthcare strategies which may actually be *experienced* as better by individuals, and contribute to their actual health.

Having said all that, of course in practice actual markets are often dysfunctional for many reasons, and it’s not as if there’s much of a competitive health insurance market. Dysfunctional markets tend to receive political intervention (see above), and maybe in the final analysis this market is so concentrated that only governmental intervention (or the threat) can bring about key features which serve individual consumers better . . .

So, I think the data show that managed care and health insurance are part of the health care pricing problem (due to their own market concentration) *and* part of the solution (due to the dysfunctionality of the healthcare products and services).

What’s my solution? Hey, if you’ve got a good one, let me know!